Should national security be a deal-breaker?

Domestic politics and protectionism still meddle with Australia's approach to foreign investments.

By Stephen Kirchner & Jared Mondschein

7 August 2018 — 12:00am

When Australia and the United States were negotiating their free-trade agreement in the early 2000s, Australia's regulation of foreign direct investment was a key stumbling block that nearly sank the deal.

One of the US government's negotiating priorities was to eliminate the Foreign Investment Review Board. The US saw Australia's regulation of foreign investment as a protectionist relic and the board as a vehicle for political interference in cross-border deals. The US, by contrast, maintained a largely open-door policy on foreign investment.

The Australia-US Free Trade Agreement commenced in 2005 only after Australia agreed to raise and simplify its foreign investment screening thresholds, setting a benchmark for the treatment of foreign investment that has since been adopted in Australia free-trade agreements with other countries and in the plurilateral Trans-Pacific Partnership agreement. The AUSFTA was a force for greater liberalisation in Australia's foreign investment regime.

More than a decade on, the US now finds itself tightening its regulation of foreign investment. Legislation passed by the US Congress last week will expand the scope and powers of the Committee for Foreign Investment in the United States, an inter-agency advisory body that serves a similar function to Australia's Foreign Investment Review Board in advising the US president.

Advertisement

The US committee is more narrowly focused than Australia's board, with a statutory mandate directed at investment that "threatens to impair the national security of the United States". This stands in contrast to Australia's open-ended "national interest" test and a foreign investment policy that includes a confusing array of economic and other non-security policy considerations, many of which duplicate or effectively second-guess regulatory frameworks for business investment that already operate behind the border.

The US Congress has so far resisted the attempts to expand the committee's mandate to include economic competitiveness. The new US legislation seeks to plug gaps in the existing US process by screening minority investments, including through venture-capital funds, and real-estate transactions near sensitive US facilities, and gives powers to review deals structured to evade the committee's jurisdiction. The legislation also tightens US export controls over sensitive technologies.

The Trump administration had previously threatened to impose blanket restrictions on foreign investment in sensitive sectors. While the administration backed away from this approach in favour of expanding the committee's powers to review individual transactions, President Donald Trump has said blanket restrictions may still be imposed if the committee's new powers do not address what the US sees a growing threat to its national security from foreign, most notably Chinese, investment.

Donald Trump holds his executive order to withdraw the US from the Trans-Pacific Partnership in January last year, ending the US's decades-old tilt toward free-trade agreements.Credit:Ron Sachs

China's authoritarian turn, its mercantilist state-led economic development policies, appropriation of foreign technology and increasingly assertive military and foreign policy posture demand a recalibration of policies to screen foreign investment for potential threats to national security.

For its part, Australia has sought to take a more systematic approach to identifying critical infrastructure and flagging concerns about foreign ownership of sensitive assets.

In this environment, it is important that Australia focuses its scarce regulatory resources on genuine risks to national security and not be distracted by the second-order issues that have proliferated in its foreign investment policy. Australian governments have unfortunately trivialised the concept of the national interest by associating it with foreign investment decisions that have often been more about domestic politics and protectionism.

National security needs to be protected behind the border over time, rather than at the border at a particular point in time. Blocking foreign acquisitions at the border may give a false sense of security in relation to security risks behind the border that exist independently of foreign ownership.

There are many ways for a domestically owned and operated firm or asset to be compromised by hostile powers beyond a formal acquisition. Addressing these risks is a task for domestic law enforcement, security and intelligence agencies. Better resourcing of those agencies would do more to secure Australia's crucial national interests than screening foreign acquisitions that, for the most part, do not pose national security risks.

However, where genuine risks to national security from foreign investment are identified by the screening process, these risks should dominate economic considerations in deciding whether to approve individual transactions.

There is still much that Australia can learn from the US in the regulation of foreign investment. Focusing our foreign investment policy more narrowly on well-defined and transparent national security principles will lead to better foreign investment decisions and increase certainty for foreign investors, allowing them to structure their transactions to meet Australia's legitimate national security concerns.